Anglo Irish Bank accounted for multi-billion euro interbank deal in 'misleading and inaccurate' way, court hears
THE WAY Anglo Irish Bank accounted for a multi-billion euro interbank deal in its end of 2008 results was “misleading and inaccurate,” an expert witness has told a jury.
Accountancy expert Dan Taylor said Anglo’s preliminary results did not disclose the connection between €7.2bn in customer deposits and the same amount in advances and loans to banks after it had exchanged cash with Irish Life and Permanent (ILP).
The deal took place at the height of the global financial crisis that September and Anglo released its preliminary report to the stock exchange in December.
Mr Taylor was giving evidence for the prosecution in the trial of Anglo’s former CEO David Drumm, who denies conspiracy to defraud and false accounting.
Judge Karen O’Connor, presiding, advised the jurors that Mr Taylor’s evidence was his opinion only, and that the issues in the case were for them alone to decide.
“This is not a trial by accountant, it’s a trial by jury,” she said.
Mr Drumm (51) is pleading not guilty to conspiring to defraud by dishonestly creating the impression that Anglo's customer deposits were €7.2bn larger than they were in September 2008.
The case centres on a series of interbank deposits which circulated between Anglo and ILP.
The transfers were routed through Irish Life Assurance (ILA), returning to Anglo where they were then treated as customer deposits, which are a better indicator of a bank’s health.
Mr Drumm also denies false accounting, by providing misleading information to the market.
Mr Taylor had begun testifying on a previous day and was concluding his evidence this afternoon.
Paul O’Higgins SC, prosecuting, asked him about Anglo’s end of 2008 preliminary announcement which was published and released to the stock exchange on December 3 that year.
Mr Taylor said there was a provision in stock exchange rules for the omission of certain information from preliminary announcements that would be contrary to the public interest or detrimental to the listed company.
The proviso was that the omission would not be misleading with regard to facts and circumstances, knowledge of which is essential for an assessment.
Mr O’Higgins asked if the accounting standards board had anything to say about the role of preliminary announcement.
The preliminary announcement should be in accordance the company’s normal accounting policies, Mr Taylor said. The standards board provided guidance about what should be included in the announcement, which was the first external communication about a bank’s year end performance.
“It plays a key part in the reporting cycle and enables to market to assess whether a company’s performance has met, exceeded or fallen short of expectations,” Mr Taylor said.
According to the standards board, he continued, the preliminary announcement must be done on a timely basis and the information in it must be “reliable and sufficient to permit an immediate and informed assessment of a company’s overall performance.”
There was an expectation that the information in the announcement was consistent with that in the audited financial statements. To permit this, the statements must be complete or at an advanced stage.
All figures in the two should agree and other information or commentary in the announcement should be consistent with the figures.
There was also guidance around management commentary which stated that it should provide adequate information on the performance of a business. The guidance went on to state that the commentary and notes to the preliminary announcement “should explain any other matters the directors think would help users to understand the report.”
The preliminary announcement was a summary of the full financial statement, Mr Taylor said.
“The overall purpose (of the guidelines) is to set out the requirements for preliminary announcements so that the market, investors, can assess the financial performance and position of a company,” Mr Taylor said.
Mr O’Higgins asked him if there were any specific requirements as to precise things that had to be disclosed.
Mr Taylor said directors had a degree of discretion as to what could be provided and could make a judgement.
Mr O’Higgins asked Mr Taylor to apply these guidelines to Anglo’s preliminary announcement of December 3, 2008 and if he had any comments to make.
Mr Taylor said the announcement would have been the first indication to the market of Anglo’s year end results and financial position and there would have been “a large degree of significance placed on them by market participants.”
Mr O’Higgins asked if anything caught his attention.
“Having reviewed the preliminary announcement, it was clear that the figures were extracted from the financial statements that were ultimately published and they did show the ILP/ILA transactions on the balance sheet gross,” he said.
Whether transactions were settled gross or net was an issue that had been raised a number of times before the jury.
“The consequence of showing them gross is that there was an additional amount of €7.2bn in the Loans and Advances to Banks asset category of the summary and an additional €7.2bn in Customer Accounts, or customer deposits,” Mr Taylor continued.
The jury was then shown the Chief Executive’s Review section of Anglo’s preliminary announcement. Mr O’Higgins asked Mr Taylor what this suggested.
“It shows that there is an increase in the level of customer deposits which is highlighted using the words ‘strong performance of our customer deposits business’,” he replied.
Mr Taylor said the review stated specifically “The continued strong performance of the bank’s customer base reflects a strong service ethos.”
Mr O’Higgins asked if there was a note explaining in any more detail what the circumstances of the transactions were.
“There was no specific disclosure relating to the balances relating to the ILP/ILA transactions and no disclosure about the connection between the €7.2bn of Loans and Advances to Banks and the €7.2bn of customer accounts balances,” Mr Taylor said.
“From an accounting point of view, what comments do you have to make about the form in which the preliminary announcement was made?” Mr O’Higgins asked.
“From an accounting perspective… how the transactions should have been treated, how they lacked commercial substance, it’s my view that the inclusion of those balances in the preliminary announcement and the related narrative comment was misleading and inaccurate in the preliminary announcement,” he said.
Mr O’Higgins asked him about the relevant accounting standard, IAS32, and what happened if this required someone to account for a transaction in that way.
Looking at IAS32 and the netting requirement, Mr Taylor replied, “that fails to consider whether or not the balances should be recognised in the first place because they didn’t have any commercial substance.”
Bernard Condon SC, defending, said he had no questions for the witness.
Before the jury retired for the day, Judge O’Connor said she wanted to explain that the evidence of Mr Taylor was opinion evidence called by the prosecution.
“It is his opinion which he has expressed and it’s no more than an opinion,” she said. “It is a matter for the jury to decide the issues in this trial and entirely a matter for the jury.”
She told the jurors they were entitled to believe or disbelieve any part of Mr Taylor’s evidence and attach whatever weight they decided to it.
The trial continues.